Difference between Gross Income and Earned Income

Gross Income

Gross income is defined as the total earnings of a person or a business within a single year. Their earnings, both as an investor or employee within a company, will be a part of the gross income. It includes all the income an individual receives in the form of goods, money, property and services, which is not exempt from taxes. Gross income includes the same measures which constitute the earned income, namely wages, salary, bonuses and commission. It also includes business income and the net of expenses in case the individual is self-employed.

Gross income also includes the investment income in the form of dividends, interest, and retirement income that is derived from the retirement account withdrawals. Additionally, the gross income also includes social security benefits, unemployment payments, child support and alimony.

Earned Income

Earned income is defined as the total income of an individual for the purpose of providing a particular service. It includes items like wages, commissions, business income as well as bonuses (minus the expenses if the person is self-employed). Earned income also includes the wages, professional fees, and any other amounts which are received as payment in lieu of the work completed by the individual. Earned income can also include the total fair market value for certain fringe benefits, which are deemed as taxable through the employer under the direction of the taxation guidelines. These long term disability benefits are received prior to the minimum retirement age along with the strike benefits from the involvement in union activities. Earned income does not include the same range of income that is accounted for under the purview of the gross income.

Difference between Gross Income and Earned Income

There are some major points of difference between gross income and earned income, and we must discuss them below to get a deeper insight into this topic:

Gross Income

Earned Income

Definition

Gross income is defined as the total earnings of a person or a business within a single year. Their earnings, both as an investor or employee within a company, will be a part of the gross income. It includes all the income an individual receives in the form of money, goods, property, and services that is not exempt from tax.

Earned income is defined as the income of an individual for providing a particular service, and it includes the commissions, wages, business income and bonuses (minus the expenses if the person is self-employed).

Scope

Gross income has a wider scope when compared to earned income (as it includes both earned as well as unearned income).

Earned income has a narrower scope when compared to gross income.

Taxation

Gross income is used to determine the total amount of taxes a person or group has to pay before adjustments.

Earned income has a limited role in determining the total amount of tax to be paid.

Conclusion

Both gross income and earned income have several differentiating factors. But they play a major role in ascertaining the tax liability of a person or a group, and hence it is important to keep proper accounting records of these two sources of earnings.

Frequently Asked Questions

What are some of the major tips to be followed while recording income for tax purposes?

Some of the major tips to record the income for tax purposes are as follows:

  • Keeping receipts: When you are preparing your taxes, you might itemise purchases like charitable donations for the purpose of deductions. Consider these filing receipts for calculating the adjustments at the end of a year.
  • Reviewing the different income sources: You must review your active and passive sources of income. As the gross income includes both, it helps to estimate the annual gross income by evaluating what a person can earn from working and what they can earn from other sources.
  • Researching the possible credits and deductions: Tax deductions and credits will help to lower the amount of a person’s gross income, which can also help you owe a lower amount on your taxes.
  • Keeping it organised: You can consider including tax refunds and information from the previous years at one filing location for easy access. It can also help you to compare the income on a year over year basis if you need to.
  • What are some of the common types of unearned income?

What are some of the common types of unearned income?

Some common types of unearned income are as follows:

  • Certificates of Deposit: It is a product that banks offer where you deposit money into an account for a fixed term, earning a fixed amount of interest.
  • Child support or Alimony: These payments are made to spouses (present or former) to help provide them with financial support.
  • Pension: It is the amount that people receive after they pay into their account while they are working.
  • Dividends: Dividends are the profits that companies distribute to shareholders in case they earn profits, or they have surpluses.
  • Gifts: If an individual receives money as a gift, it is classified as unearned income.

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